Ch. 14 Corporate Tax Anti-avoidance Rules

Transcription

1 Ch. 14 Corporate Tax Anti-avoidance Rules In the U.S. corporate income tax context U.S. Treasury Department has concerns about: 1) Avoidance of the double tax on corporate/shareholder taxation. 2) Avoiding high marginal tax rates for individuals, including through the use of corporate entities. 3) The significant reduction of corporate tax liabilities through corporate tax shelters, and similar arrangements (e.g., leasing arrangements). 12/5/2013 (c) William P. Streng 1

2 Anti-Avoidance Rules in this Chapter 14 1) Economic substance doctrine tax common law doctrine transformed into a statutory provision. 2) Accumulated earnings tax p.626. Penalty tax is imposed when a corporation is availed of to avoid the shareholder level tax. Individual rates are higher than corporate rates. 3) Personal holding company tax can not use a corporation as one s individual pocketbook (and accumulate income in corp. taxed at a lesser rate). 12/5/2013 (c) William P. Streng 2

3 Prior Attempts to Limit Corporate Tax Shelters 1) IRS litigation strategy (case-by-case). 2) Disclosure of tax shelter investments required, including the registration of tax shelters. See IRS Notice with a list. 3) An increased no fault substantial understatement penalty. 4) Penalties for failure to disclose. 5) Enhanced requirements on the conduct of professionals re opinions. Treasury Circular /5/2013 (c) William P. Streng 3

4 UPS case p.612 Economic substance? UPS organized offshore subsidiary (OPL) to provide reinsurance for excess value insurance on shipments. Why use National Union in the deal? OPL shares were distributed to UPS shareholders. Issue re whose income for the excess value net amount - economically realized by OPL or UPS? Real economic substance to this arrangement? Held: Not a sham transaction; adequate business purpose existed; but is 482 applicable? 12/5/2013 (c) William P. Streng 4

5 Economic Substance doctrine p.619 1) Economic substance doctrine: Transactions are to have economic substance separate and apart from the economic benefit achieved merely from the income tax reduction obtained. A meaningful change to the taxpayer s economic position must occur. 2) Business purpose doctrine (p.619): was a nontax objective sought to be achieved? Are both requirements to be satisfied? P /5/2013 (c) William P. Streng 5

6 Economic Substance doctrine, cont. p.620 Do financial accounting benefits provide a non-tax business purpose? No. P.621 Consider the relevance of tax-indifferent parties as being included in a transaction. What is a tax indifferent party? Ultimate question: Does this transaction satisfy the economic substance doctrine? P /5/2013 (c) William P. Streng 6

7 Economic Substance Doctrine Codified p (o) is entitled as a clarification of economic substance doctrine, i.e., a common law doctrine. A transaction has economic substance only if (1) transaction changes in a meaningful way the taxpayer s economic position, and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. I.e, the conjunctive test applies. 12/5/2013 (c) William P. Streng 7

8 Economic Substance Doctrine Codified, cont. 7701(o)(2)(A) a pre-tax profit potential is to be substantial in relation to present value of expected net tax benefits. 7701(o)(2)(B) Transaction expenses are to be taken into account as expenses in determining pretax profit. And, a financial accounting benefit is not taken into account for legitimating the transaction. 7701(o)(4). 12/5/2013 (c) William P. Streng 8

9 The Protected Angel List p Debt v. equity. - Domestic or foreign entity. - Corporate organization or reorganization - Related party transactions (outside 482). Plus, use of specific statutory tax incentives. But, IRS does not confirm this listing. And, no private letter rulings. Notice /5/2013 (c) William P. Streng 9

10 Problem p.625 Proceeding with a corporate acquisition transaction structured as a stock-for-stock exchange but (1) with minimal cash included so as to frustrate B reorg. status, and (2) therefore, trigger loss on Target stock to get the tax benefit of accrued loss on the stock being transferred. Is this structured failed B reorg transaction subject to, and is loss utilization limited by, applicability of the economic substance doctrine? 12/5/2013 (c) William P. Streng 10

11 Problem, cont. The Busted B P.625 Is the economic substance doctrine relevant here? Is the relevancy of this doctrine determined on whether 7701(o) is applicable in a pre-enactment situation? If not applicable, then, the no boot in a B rule should be controlling and loss realization should be recognized (the economic substance doctrine then not being relevant). 12/5/2013 (c) William P. Streng 11

12 Problem, cont., Part (b) The Busted B P.626 Assuming the economic substance doctrine is relevant here: If so, then how apply the two tests 1) Was there a meaningful change in the taxpayer s economic position? and, 2) Did the taxpayer have a substantial non-tax purpose for entering into this transaction? Desire to recognize a tax loss existed; there was a meaningful change in economic position; economic loss existed before the transaction. But, could have sold the stock for cash. 12/5/2013 (c) William P. Streng 12

13 Problem, Part (b), cont. The Busted B P.626 Should this transaction be on a deemed acceptable transaction angel list (see JCT report), since taxpayers should be able to structure transactions as complying with (or not) various statutory provisions (e.g., 351, 368, 332, 1031, and other Code non-recognition provisions). This is not the type of transaction intended to be penalized through the enactment of 7701(o). 12/5/2013 (c) William P. Streng 13

14 Accumulated Earnings Tax p. 626 Issue: Can a corporation be used as the temporary location for assets after incurring (lower) corporate tax rate and before (if at all) incurring a second, higher income tax rate for shareholders? Incentive from applicability of accumulated earnings tax to strip earnings from corporation on a tax deductible basis (e.g., compensation and fringe benefits)? Wait for a redemption transaction to extract earnings on a low taxed basis (i.e., capital gains)? 12/5/2013 (c) William P. Streng 14

15 Accumulated Earnings Tax Imposition p. 627 Tax is imposed at 20 percent of C corporation s accumulated taxable income. Accumulated earnings credit (offset) of up to $250, 000 (Code 535(c)(2)); limited to $150,000 for personal service corporations. Reduction of accumulated taxable income in determining evidence of purpose to avoid income tax. Code 533 and /5/2013 (c) William P. Streng 15

16 Identifying Reasonable Need of the Business p.630 Myron s Enterprises, p /5/2013 (c) William P. Streng 16